Will tax inversion lead to greater profits for these high-growth stocks?


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By Mary-Lynn Cesar for Kapitall.

On Sunday, Minneapolis-based medical device maker  Medtronic Inc. ( MDT )  announced that it was acquiring rival  Covidien plc ( COV )  for $42.9 billion. While the deal brings Medtronic significantly closer to realizing its global and portfolio strategies, another interesting aspect of the acquisition is that the new company will be headquartered in Ireland. The Emerald Isle is popular with corporations thanks to its 12.5% corporate tax rate, which is considerably lower than the US's 35%. 

If the acquisition is approved and Medtronic does officially make Ireland its tax domicile, Bloomberg reports that it will be the biggest company to avoid US corporate taxes-the highest in the world-by incorporating abroad. The maneuver, called tax inversion, has grown increasingly prevalent within the healthcare and oil industries over the last few years.

Pfizer ( PFE ) flirted with the idea in May while pursuing  AstraZeneca ( AZN ) , which is headquartered in London. Back in 2012, Dr. Dre established a tax base  in Ireland for Beats. In total, around 44 American companies have incorporated abroad in recent years, costing the US billions in tax revenue.

Some companies claim that tax inversion will enable them to increase profits since they'll be paying less in taxes. In 2012,  Aon ( AON ) told analysts that the company's move to the UK was expected to lower its tax rate by five percentage points and, in turn, potentially boost annual profits by $100 million.

The potential for greater profits as a result of a reduced tax rate inspired us to take a closer look at the companies involved with tax inversion. We began with a universe of stocks pulled from Bloomberg's list of companies that have made tax inversion deals over the last nine years.

Next, we screened that group for companies that have greater earnings per share ( EPS ) growth trailing twelve months ( TTM ) vs. prior TTM than the industry average  and  projected EPS growth for next year greater than the industry average . This shows that these companies were high-growth firms in the past and are believed to be high-growth firms into the near future.

Finally, we looked for potentially undervalued stocks by screening for stocks with a  price-to-book (P/B) ratio below the industry average . This valuation ratio compares a stock's price to its book value and is calculated by dividing the most recent closing price by the stock's book value per share in the most recent quarter.

Like many valuation ratios, a low P/B ratio doesn't guarantee that a stock is undervalued; in fact, there may just be something wrong with the firm. That's why we looked at EPS growth first so we could get a sense of past performance and perceived forward trajectory.

We were left with three stocks on our list. Do you think tax inversion will be a major contributing factor to the EPS growth of these companies? Use this list as a starting point for your own analysis.

Click on the interactive chart to view data over time. 

1. Argo Group International Holdings, Ltd. ( AGII , Earnings , Analysts , Financials ): Underwrites specialty insurance and reinsurance products in the property and casualty market worldwide. Market cap at $1.31B, most recent closing price at $49.92.

EPS growth (TTM vs. prior) TTM is 138.26% vs. an industry average of 101.27%.

Projected EPS growth (next year vs. this year) is 12.26% vs. an industry average of 8.32%.

P/B at 0.86 vs. an industry average of 1.55.

The company acquired PXRe and moved to Bermuda in 2007.

2. Applied Materials Inc. ( AMAT , Earnings , Analysts , Financials ): Provides manufacturing equipment, services, and software to the semiconductor, flat panel display, solar photovoltaic (PV), and related industries worldwide. Market cap at $27.23B, most recent closing price at $22.37.

EPS growth (TTM vs. prior) TTM is 315.15% vs. an industry average of 57.25%.

Projected EPS growth (next year vs. this year) is 25.23% vs. an industry average of 21.56%.

P/B at 3.76 vs. an industry average of 4.10.

The company is acquiring Tokyo Electron and will move to the Netherlands this year.

3. Chiquita Brands International Inc. ( CQB , Earnings , Analysts , Financials ): Engages in the distribution and marketing of bananas and fresh produce under the Chiquita and other brand names worldwide. Market cap at $473.89M, most recent closing price at $10.10.

EPS growth (TTM vs. prior) TTM is 89.07% vs. an industry average of 47.30%.

Projected EPS growth (next year vs. this year) is 593.75% vs. an industry average of 13.58%.

P/B at 1.23 vs. an industry average of 5.91.

The company is merging with Fyffes and will be based in Ireland.

(List compiled by Mary-Lynn Cesar. EPS and P/B data sourced from Fidelity. Monthly return data sourced from Zacks Investment Research. All other data sourced from Finviz.)

Kapitall Wire is a division of New Kapitall Holdings, LLC. Kapitall Generation, LLC is a wholly owned subsidiary of New Kapitall Holdings, LLC. Kapitall Wire offers free investing ideas, intended for educational information purposes only. It should not be construed as an offer to buy or sell securities, or any other product or service provided by New Kapitall Holdings, LLC, and its affiliate companies.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Stocks
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